Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

5 Ways to Keep Your Broker Honest

In recent years, there has been a tectonic shift as brokers have left their big firms to set up shop on their own. Generally speaking, this transition is good news, as the newly independent broker can simply focus on your needs.

But if you're still working with one of the big boys, you need to keep in mind the pressure that is placed on its brokers to make sales and push deals. As a result, your broker may not be working in your best interest.

There's no need to assume that you'll always get the raw end of any deal, but it's your right to develop a high level of comfort. And that means honest communication and lots of transparency.
 
To make sure your broker is watching your back, keep an eye out for these pitches that will end up costing you in the end.

 
1. "My analyst loves this stock."
 
If your broker is pushing a stock idea on you, it's at least a few days old, and perhaps a lot longer than that. The best ideas are first shared discreetly among the firm's most favored clients and, even more egregiously, with the firm's proprietary trading desk. Ever wonder how these internal trading operations seem to make money, even when their clients lost money? Now you know. And sometimes, a firm decides that its traders hold too much of a certain stock. And guess who has been told to help get rid of those shares? The broker. The solution: Work with folks who have zero conflicts of interest.
 
2. "We got this stock at a great price for you."
 
Your broker may have gotten you shares at $24, but his firm may have only paid $23.90 a share. That may not seem like much, but it's a hidden source of profits for the firm. Every "buy" or "sell" order should have a trading ticket. And it's easy to "assign" those tickets to particular trades. Electronic trading has eliminated some of this abuse, but it still goes on, especially at smaller broker-dealers. There is a range of high integrity broker-dealer firms out there, but there are even more firms that cut too many corners. To keep your broker honest, find out what time of day a trade was made, and go back to the intra-day chart on Google Finance or Yahoo! Finance to confirm. Better yet, insist on real-time trade confirmations.

3. "We're getting in on this hot new deal."

Be wary of any offers of IPOs or other financial instruments that are being sold in an offering to clients. Each deal comes with a prospectus that highlights the lead deal manager, and then the supporting firms, known as the syndicate. If your firm is at the bottom of that list, then stay away. Here's how it works: If your firm just got their hands on some stock to sell, and the deal is going to take place in a few days, then that's a sure sign that demand was fairly weak, and your firm was brought in at the last minute. That often means the deal is a dog. Hold your nose and say: "No thanks."
 
4. "You should buy this now. It won't be a good deal next week."
 
Stock brokers are under the gun to generate trades. And their supervisors will push them to meet quotas at the end of the month or the end of the quarter. Don't feel an obligation to take your broker's advice if his or her idea doesn't seem like a good one and is coming at the end of one of these periods. I'd suggest getting in the habit of declining some of your broker's ideas when you first establish a relationship. See how those ideas performed over time. If your broker values your business, just explain that you'll accept more of her ideas down the road, but have her keep telling you what she likes right now.
 
5. "Your broker just left, but we've got a better one to take his place."
 
Huh? Where did they go? Why did they leave? Try to find where that broker went and try to speak to him or her. They may be prevented from candidly saying why they left, but their "body language" over the phone should tell you everything. Brokers often leave for basic reasons such as higher commissions. But sometimes they leave when the firm slips below their standards of integrity.
 
To repeat, this is an industry filled with many bright, caring people. But that doesn't mean that your needs always come first. Keep an eye toward good communication and transparency. Don't settle for less.